Under the previous Business Tax (BT) system, there was occasional debate on whether service fees obtained by taxpayers for withholding and remittance, collecting and remittance, and entrusted collection were subject (hereinafter referred to as the “three tax services”) to BT. However, in practice, most tax authorities generally leaned towards exempting such fees from BT. With the implementation of the VAT reform, inconsistencies have emerged among local tax authorities regarding whether VAT should be imposed on these service fees.
By Ben Lu
Under the previous Business Tax (BT) system, there was occasional debate on whether service fees obtained by taxpayers for withholding and remittance, collecting and remittance, and entrusted collection were subject (hereinafter referred to as the “three tax services”) to BT. However, in practice, most tax authorities generally leaned towards exempting such fees from BT. With the implementation of the VAT reform, inconsistencies have emerged among local tax authorities regarding whether VAT should be imposed on these service fees.
In determining the taxability of any transaction and its corresponding income, unless there are explicit provisions in tax laws, administrative regulations, or official interpretations issued by the Ministry of Finance (MOF) and the State Taxation Administration (STA) within their respective competencies, the matter should be assessed based on tax system principles, the spirit and objectives of relevant tax laws, and the intrinsic nature of the transaction. Even when the MOF and STA provide clear guidance, if tax laws and administrative regulations do not explicitly define the issue, further examination of the underlying tax principles, legislative intent, and transaction characteristics is still necessary to ensure an accurate, fair, and reasonable determination of taxability.
I. Examination of the VAT Treatment of Service Fees for the “Three Tax Services”: Current Tax Enforcement Practices
According to the "Notice of the MOF, STA, and the People’s Bank of China on Strengthening the Management of Service Fees for Withholding, Collection, and Entrusted Collection of Taxes" (Caihang [2019] No. 11):
●Article 1(1) defines "withholding and remittance" as the act of entities or individuals, obligated by tax laws and administrative regulations to withhold tax, deducting the tax amount from payments made to taxpayers and remitting it to the tax authority.
●Article 1(2) defines "collection and remittance" as the act of entities or individuals, obligated by tax laws and administrative regulations to collect tax, collecting tax from taxpayers when receiving payments and remitting it to the tax authority.
●Article 1(3) defines "entrusted collection" as the act of entities or individuals, entrusted by tax authorities in accordance with the Tax Collection and Administration Law and its implementing rules, to collect scattered and out-of-area taxes under principles of voluntariness, efficiency, and legal compliance.
Additionally, Article 30(3) of the Tax Collection and Administration Law provides that tax authorities shall pay service fees to withholding agents for tax withholding and collection.
Based on these provisions, service fees for the “three tax services” refer to remuneration paid by the state treasury to taxpayers for fulfilling tax withholding, collection, and entrusted collection obligations. This includes "withholding and remittance service fees," "collection and remittance service fees," and "entrusted collection service fees."
Currently, neither tax laws and regulations nor formal interpretations from the MOF or STA explicitly address whether service fees for the “three tax services” are subject to VAT. Consequently, different tax authorities have adopted varying positions in tax enforcement, often clarifying their stance through policy interpretations or consultation responses. These positions generally fall into three categories:
1.Treating the “Three Tax Services” as "Brokerage and Agency Services" Subject to VAT
This is the most common approach. For instance, Article 34 of the "Chongqing State Taxation Bureau VAT Reform Policy Guide (II)" (issued on August 4, 2016) states that, under Caihang [2005] No. 365, service fees for the “three tax services” should be accounted for separately and included in the entity's revenue, such fees can be used for management expenses and as incentives for relevant personnel. According to Cai Shui [2016] No. 36, the “three tax services” fall under "brokerage and agency services" in the modern service category and are subject to VAT at a 6% rate. Similar interpretations have been adopted by tax authorities in Shanghai, Shenzhen, Inner Mongolia, Xiamen, Fujian, Dalian, Anhui, Liaoning, and other regions.
2.Transitioning from Non-Taxability to Taxability
Some tax authorities initially did not impose VAT on service fees for the “three tax services” but later shifted to a taxable approach. For example, Article 8 of the "Hubei State Taxation Bureau VAT Reform Policy Execution Guidelines (Fourth Edition)" (issued on November 24, 2016) stated that service fees earned by enterprises for withholding individual income tax (IIT) were not subject to VAT. However, this position was overturned when the "Hubei Province VAT Reform Q&A Collection" (effective January 1, 2018) repealed the earlier guideline and stipulated in Article 63 that all service fees earned by enterprises for withholding taxes should be subject to VAT as "brokerage and agency services," following Cai Shui [2016] No. 36.
3.Exempting Service Fees from VAT
This approach is less common in practice. For example, Article 23 of the "Hunan State Taxation Bureau VAT Reform Policy Guide (IV)" (issued on December 26, 2016) states that service fees earned by insurance companies for collecting and remitting vehicle and vessel tax, as well as by enterprises for withholding IIT, are not subject to VAT since such activities constitute the fulfillment of statutory tax withholding obligations rather than the sale of services, which are subject to VAT.
On May 8, 2021, the STA published a response on its official website titled "Are Enterprises Required to Declare VAT on Service Fees Earned from Withholding IIT?" The response referenced Cai Shui [2016] No. 36 and the "Interpretation on Sales of Services, Intangible Assets, and Real Estate," stating that brokerage, intermediary, and agency services include financial agency, intellectual property agency, freight forwarding, customs brokerage, legal agency, real estate brokerage, employment agency, marriage agency, bookkeeping agency, and auctioneering. Consequently, service fees earned by enterprises for withholding IIT fall within the VAT tax base and should be taxed under "business support services - brokerage and agency services."
Although this response was issued as a policy interpretation rather than a legally binding regulatory document, its authority as an STA-issued statement provides significant guidance in practice.
II. VAT Is Levied Solely on Business Activities (Transactional Conduct)
The fundamental principle of VAT is that it applies exclusively to business activities and the income generated therefrom. According to Article 10 of the "Provisional Measures on the Pilot Reform of Business Tax to VAT," sales of services, intangible assets, or real estate refer to the provision of services or transfer of intangible assets or real estate for consideration, except in the following non-business scenarios:
1.Government funds and administrative fees collected by administrative units that simultaneously meet the following conditions:
●Established with approval from the State Council or the Ministry of Finance (MOF) for government funds, or with approval from the State Council, provincial-level governments, or their finance and pricing authorities for administrative fees;
●Collected using fiscal invoices issued or supervised by provincial or higher-level finance departments;
●Fully remitted to the state treasury.
2.Services rendered by employees of a legal entity or sole proprietorship to the entity or employer in exchange for salaries.
Salaries paid to employees for services provided to their employer.
3.Services provided by a legal entity or sole proprietorship to their employees.
4.Other scenarios specified by the MOF and STA.
Additionally, Article 1(2) of the "Provisions on Issues Related to the Pilot Reform of Business Tax to VAT" explicitly lists five non-taxable transactions, including government-mandated free transport services, interest on deposits, insurance indemnities, residential maintenance funds collected by designated entities, and the transfer of assets in restructuring transactions.
III. The VAT Taxability of Service Fees for the “Three Tax Services” Should Be Treated Differently Based on the Nature of the Tax Service
Although the provisions under Cai Shui [2016] No. 36 do not include service fees for the “three tax services” among the exempted items, whether specific behaviors not listed in the aforementioned provisions should fall within the scope of VAT taxation remains unclear. Before any explicit legal, regulatory, or policy-based guidance from competent authorities, taxability should be determined based on the nature of the transactions and the principles of VAT tax law.
As previously discussed, most tax authorities currently categorize all "three tax services" under "modern services" and specifically as "brokerage and agency services" within "business support services."
According to Article 951 of the Civil Code of the People's Republic of China, “A commission contract is a contract under which a commission agent acts in their own name to engage in trade activities for the principal, who pays the commission.” Commission services only apply to “trade activities.” However, services such as “withholding and remitting” and “collecting and remitting” clearly do not constitute “trade activities,” so they cannot be classified as “brokerage services.” Therefore, if VAT is levied under the “brokerage and agency services” category, it must be recognized as “agency services.”
The author believes that, in reference to Article 29 of the “Tax Collection and Administration Law of the People’s Republic of China,” which states that “no entity or individual, except for tax authorities, tax officials, and those entrusted by tax authorities according to law or administrative regulations, shall carry out tax collection activities,” and Article 89, which allows taxpayers or withholding agents to entrust tax agents to handle tax matters, the term "agency" in the Tax Collection and Administration Law, borrowed from civil and commercial law, has not been specially defined in tax laws, regulations, or by the Ministry of Finance (MOF) or the State Taxation Administration (STA). Therefore, the concept of "agency" in tax law should be consistent with the civil and commercial legal field, with no significant distinction between the two.
According to Article 163 of the Civil Code of the People's Republic of China, “Agency includes both entrusted agency and statutory agency. An entrusted agent exercises the agency rights based on the principal's authorization. A statutory agent exercises agency rights according to law.” Articles 161 of the Civil Code states that “Civil subjects may engage in civil legal acts through agents,” and Article 162 specifies that “An agent’s civil legal acts, conducted within the scope of their authority and in the name of the principal, have binding legal effect on the principal.” This defines entrusted agency, whereas statutory agency is defined in Articles 19, 20, 21, 22, and 61, which refer to situations such as a guardian acting as a statutory agent for individuals with no or limited capacity to act or the legal representative of a legal entity acting on behalf of the entity.
1."Withholding and Remitting" and "Collecting and Remitting" are Essentially Different from Civil and Commercial Law’s "Agency Behavior," and Their Classification as "Brokerage and Agency Services" for VAT Imposition Contradicts the Substance of the Behavior
1.1"Withholding and Remitting" and "Collecting and Remitting" Are Statutory Obligations of Withholding Agents without Discretion to Choose
According to Article 5 of the Civil Code of the People's Republic of China, “Civil subjects shall follow the principle of voluntariness when engaging in civil activities, and establish, alter, or terminate civil legal relationships in accordance with their own will.” If the withholding agent’s actions of "withholding and remitting" or "collecting and remitting" were considered agency tax collection behavior, the withholding agent, based on the principle of autonomy of will, should have the right to refuse to accept such a commission. However, according to Article 4(2) of the Tax Collection and Administration Law of the People’s Republic of China, which stipulates, “Entities and individuals that are obligated by laws and administrative regulations to withhold and remit, or collect and remit taxes, shall be withholding agents,” and Article 4(3), which states “Taxpayers and withholding agents must pay taxes, withhold and remit, or collect and remit taxes in accordance with the provisions of laws and administrative regulations,” as well as Article 30(1), which specifies, “Withholding agents shall perform the obligations of withholding and collecting taxes as prescribed by laws and administrative regulations,” withholding agents are required to fulfill their withholding duties without the discretion to choose, and thus cannot be considered as voluntary agents in the sense of civil and commercial law.
So, does the withholding agent qualify as a statutory agent? While the establishment of a statutory agency does not depend on the will of the statutory agent but rather on the identity relationship between the statutory agent and the principal (such as position, kinship, etc.), a statutory agent’s actions still rely on their free will when exercising agency, including whether, how, and when the specific act is carried out. However, in the case of “withholding and remitting” or “collecting and remitting” taxes, the withholding agent is legally required to perform the withholding duty within a prescribed time, manner, and form. In other words, the withholding agent has no discretion over their identity as an agent and their actions are constrained by clear legal mandates.
Furthermore, regarding statutory agency, current civil and commercial law provisions and judicial practices refer only to the statutory agency for individuals who are incapable of civil action or have limited civil capacity, as well as to the statutory agency for the legal representatives of companies or other organizations. A withholding agent, however, is neither an agent of the tax authority nor an agent of the state or government. Therefore, the withholding agent clearly does not qualify as a statutory agent.
1.2The Legal Consequences of "Withholding and Remitting" and "Collecting and Remitting" Are Significantly Different from the Legal Consequences of Agency Actions
Whether in the case of an entrusted agency or statutory agency, the consequences of the agent's actions directly affect the principal or the party legally represented, and the responsibility for failure to fulfill the agent's duties falls under the scope of civil liability. According to Article 164 of the Civil Code of the People's Republic of China, “If the agent fails to perform or incompletely performs their duties, causing damage to the principal, they shall bear civil liability. If the agent and the counterparty collude maliciously to harm the legal rights and interests of the principal, the agent and the counterparty shall bear joint liability.” and Article 62, which states, “If the legal representative causes damage to others while performing their duties, the legal person shall bear civil liability. After the legal person bears civil liability, it may seek compensation from the legal representative who was at fault, in accordance with the law or the legal person's articles of association”, in cases of entrusted agency or statutory agency, if the agent neglects their duties or colludes maliciously to harm the interests of the principal, they are only liable for loss compensation or other civil liabilities in accordance with the law. Unless the act itself constitutes an administrative violation or a crime, it will not lead to administrative penalties or administrative responsibility, nor will it result in criminal responsibility.
However, in the case of "withholding and remitting" or "collecting and remitting" taxes, according to the State Taxation Administration's notice on specific issues regarding the Tax Collection and Administration Law of the People's Republic of China (Guo Shui Fa [2003] No. 47), Article 2(3), “If the withholding agent fails to withhold or collect the tax that should be withheld or collected, the tax authority, in addition to imposing penalties according to the relevant provisions of the Tax Collection and Administration Law and its implementation rules, shall require the withholding agent to make up the tax that should have been withheld or collected within the prescribed time.” Furthermore, according to Article 69 of the Tax Collection and Administration Law states, “If the withholding agent fails to withhold or collect the tax that should be withheld or collected, the tax authority shall recover the tax from the taxpayer and impose a fine on the withholding agent ranging from 50% to 300% of the tax that should have been withheld or collected.”
This clearly illustrates that the legal consequences of "withholding and remitting" or "collecting and remitting" taxes are significantly different from the consequences in entrusted or statutory agency.
1.3The Severe Disproportion Between the Service Fees for "Withholding and Remitting" and "Collecting and Remitting" and Their Legal Consequences
The specific standards for the service fees for withholding and remitting, as well as collecting and remitting taxes, are determined by clear legal, regulatory, and normative provisions, and statutory standards, with no room for arbitrary negotiation as in agency situations. Moreover, there is a severe disproportion between the service fees earned by the withholding agent and the responsibilities they bear.
According to Article 30(3) of the Tax Collection and Administration Law of the People's Republic of China, “The tax authorities shall pay withholding agents service fees for withholding and collecting taxes according to the regulations.” Furthermore, Article 3 of Caihang [2019] No. 11, "(i) For taxes that are required to be withheld and remitted as stipulated by laws and administrative regulations, the tax authorities shall pay a service fee not exceeding 2% of the tax withheld, with a maximum annual limit of 700,000 yuan per individual withholding agent. Any amount exceeding this limit shall not be paid. For taxes where the service fee percentage is specifically stipulated by laws and regulations, the fee shall be paid according to the prescribed percentage. (ii) For the collection and remittance of vehicle and vessel tax as stipulated by laws and administrative regulations, the tax authorities shall pay a service fee not exceeding 3% of the tax collected. (iii) For the collection and remittance of excise tax for entrusted processing as stipulated by laws and administrative regulations, the tax authorities shall pay a service fee not exceeding 2% of the tax collected. No service fee shall be paid if the principal and the agent have a related party relationship, as defined by the Corporate Income Tax Law of the People's Republic of China and its implementation regulations. (iv) For the collection and remittance of other taxes as stipulated by laws and administrative regulations, the tax authorities shall pay a service fee not exceeding 2% of the tax collected.”
As a result, the service fees that a withholding agent receives for fulfilling their legal duties of withholding and remitting or collecting and remitting taxes are generally capped at 2% of the tax withheld or collected, with a maximum of 3%, and may also be subject to annual limits. Moreover, according to Article 69 of the Tax Collection and Administration Law, if the withholding agent fails to fulfill or inadequately fulfills their withholding obligations, they may face fines of up to three times the amount of the tax that should have been withheld or collected. This indirectly confirms that withholding and remitting or collecting and remitting taxes are not entrusted agency actions, but rather mandatory legal obligations imposed on withholding agents by clear laws and administrative regulations.
2.“Entrusted Tax Collection” Behavior Aligns with the Essential Characteristics of "Entrusted Agency" in Civil and Commercial Law, and Its Classification as "Brokerage Agency Service" for VAT Purposes is Legally Justified
According to Article 29 of the Tax Collection and Administration Law of the People's Republic of China, “no entity or individual, except for tax authorities, tax officials, and those entrusted by tax authorities according to law or administrative regulations, shall carry out tax collection activities,” and Article 44 of the Implementation Regulations of the Tax Collection and Administration Law states, “Tax authorities may, in accordance with the principle of facilitating tax control and taxpayer convenience, entrust relevant entities and individuals to collect scattered and out-of-area taxes, and issue entrusted tax collection certificates. The entrusted entities and individuals shall collect taxes on behalf of the tax authorities in accordance with the requirements of the entrusted tax collection certificate, and taxpayers shall not refuse to pay.”
According to the Caihang [2019] No. 11, Article 1, Subparagraph (3), and the Announcement by the State Taxation Administration on the Release of the "Measures for the Administration of Entrusted Tax Collection" (State Taxation Administration Announcement No. 24, 2013), Article 3, Paragraph 2, “The term ‘entrusted collector’ refers to the entities or individuals who are entrusted by the tax authorities to exercise the right to collect taxes and bear the obligations specified in the ‘Entrusted Tax Collection Agreement’,” and Article 22, “If the entrusted collector fails to collect or under-collect taxes, the tax authorities shall recover the taxes from the taxpayer and may impose a penalty for breach of contract on the entrusted collector at a rate of 0.05% per day of the under-collected tax, as stipulated in the ‘Entrusted Tax Collection Agreement’, except where the taxpayer has refused to pay and the entrusted collector reports to the tax authorities within 24 hours. If the entrusted collector over-collects taxes, the tax authorities shall bear the corresponding legal responsibility and order the entrusted collector to refund the excess amount. If the tax has already been deposited, the tax authorities shall handle the refund procedures as per regulations; if the over-collection results in damage to the taxpayer’s legitimate rights, the tax authorities shall compensate the taxpayer, and the tax authorities have the right to pursue recovery from the entrusted collector.”
Although the specific limits for "entrusted tax collection" service fees depend on the explicit provisions of relevant normative documents and cannot be arbitrarily agreed upon by the tax authorities and the entrusted collector, there are several points to consider:
●The service fee for “entrusted tax collection” is generally significantly higher than that for “withholding and remitting” or “collecting and remitting” taxes.
●The entrusted collector has the right to refuse to establish an entrusted tax collection relationship with the tax authorities if negotiations fail.
●The legal consequences of the entrusted collector’s actions directly fall under the tax authorities’ responsibility.
●If the entrusted collector fails to fulfill or adequately fulfill their tax collection obligations, they are only required to bear civil liabilities such as breach of contract or compensation to the tax authorities, and do not face administrative or criminal penalties.
Therefore, "entrusted tax collection" possesses the typical characteristics of an entrusted agency. The actions performed by the entrusted collector in tax collection constitute “brokerage agency services,” which are taxable behaviors under the current VAT-related laws. The service fees earned by the entrusted collector, although coming from fiscal subsidies or rewards, are clearly paid by the tax authorities within their departmental budget, as specified in Article 4, Subparagraph (1), Item 2 of Caihang [2019] No. 11: "The service fees for the ‘three tax services’ shall be settled annually. Withholding agents, collecting agents, and entrusted collectors shall submit relevant materials for the service fee application to the tax authorities by March 30 each year... Each level of tax authority shall strictly review the application for service fees and use it as the basis for preparing the next year’s departmental budget," and Item 4: "Each level of tax authority shall include the application for ‘three tax services’ service fees in the next year’s departmental budget, according to the procedures and requirements of the Budget Law of the People's Republic of China and the State Council's decisions on deepening budget management system reform." Therefore, this portion of the service fees is clearly part of the consideration under the entrusted agency contract of the entrusted collector and should be subject to VAT according to the law.
